I came across this excellent infographic that talks about real-estate and its place in your investment portfolio:
It (rightly) questions the typical “Wall Street” view that (a) asset allocation is important, and (b) that a 60/35/5 stocks/bonds/cash mix is the only way to secure your financial future.
Of course, a ride through 2008 fixed that view for a lot of folk …
So, I was quite impressed that a site that provides financial / portfolio allocation advice actually considers real-estate to be a viable investment option, and an equally important part of your portfolio.
The suggestion is to use real-estate to provide the real diversification that you need.
And, it may even be the right for successful investors (although, I prefer a portfolio that is more like 90/5/5 real-estate/stocks/cash) …
… but, it is not the right approach for investors who want to become successful.
Let me explain.
The balanced portfolio may help you retain your wealth if you already have it (i.e. if you are already a successful investor), but is unlikely to make you rich on your own.
You see, in order to:
– Become wealthy, and
– Maintain your wealth along the way
… you need two things:
1. An Income Driver: i.e. something to provide an ever-source of cashflow, and
2. A place to invest that cashflow that compounds.
The good news is that you can achieve this simply by modifying the second, larger section of the pie-chart, somewhat:
Your own business is the best way to provide a rich vein of income that you can then tap to fund an ever-growing investment empire in real-estate.
Now, you can certainly grow income in other ways besides having your own business: you could look for a sales job that pays very high commissions (hundreds of thousands per year; or, a management job (preferably, c-level: ceo/cfo/cmo/cto) that pays the same, or better; or, take on a second job or a part-time job; and, so on.
But, nothing has the earnings-growth potential of your own business (although, the ceo’s of certain Fortune 500 companies might – quite rightly – argue that point).
But, why real-estate?
Because both the capital value of the asset (i.e. the amount that you paid for it) and the income stream grow at least in line with inflation, given a long-enough investment horizon … so, you get a double-whammy of increase in your net-worth (i.e. the building grows in value) and the ever-growing rental income stream – if you save it rather than spend it – will eventually help you buy another, and another, and so on.
Keep this up for long enough, say 7 years, and my experience says you can become rich 🙂